A 

A 

0 

cz 

0 

:n 

1 

1 
9 

4 

Calif  C3rnia  State  Tax 
Association 


The  Problem  of  Taxation  in 
California 


THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 

EX  LIBRIS 

EDWARD  A.  DICKSON 

I 879-1 956 

REGENT  OF  THE  UNIVERSITY 
I913-I956 


CALIFORNIA      STATE      TAX      ASSOCIATION. 

THE 

PROBLEM   OF  TAXATION 

IN   CALIFORNIA 


Being  a  Brief  Discussion  of  the  Revenue  System,  State  and  Local, 

the  Administration  of  Revenue  Laws,  and  Measures  Pending 

Before  the  Legislature  Looking  to  the  Improvement 

of  the  System  and  Its  Administration. 


February  20,  191 5. 


CALIFORNIA      STATE      TAX      ASSOCIATION. 


CALIFORNIA      STATE      TAX      ASSOCIATION. 


THE 

PROBLEM  OF  TAXATION 

IN  CALIFORNIA 


Containing 

Page 
Introduction * 

Discussion   of  present  revenue  system 3 

Administration  of  local  revenue  laws 9 

Summary   of  pending  measures 15 


SAN   FRANCISCO: 

The    Recorder   Printing   and   PublislJing    Company 

1915 


INTRODUCTION. 

The  present  condition  of  State  revenues,  combined  with  the 
tremendous  increases  in  local  taxation  during  the  past  four  years 
and  the  difficulties  experienced  by  the  State  in  its  efforts  to 
equalize  corporation  taxes,  has  brought  the  Legislature  to  con- 
sider the  advisability  of  inaugurating  a  general  program  of  State 
and  local  tax  reform  in  California. 

In  three  pending  measures  the  first  steps  towards  revising 
the  revenue  system  and  improving  the  administrative  machinery 
are  proposed.  Although  these  measures  supply  only  the  ground- 
work for  the  changes  which  it  will  be  necessary  to  make  two 
years  hence,  they  are  none  the  less  important  or  deserving  of 
attention  from  every  member  of  the  Legislature  and  every  tax- 
payer. 

It  is  to  facilitate  an  understanding  of  these  measures,  of  the 
conditions  which  gave  rise  to  their  introduction,  and  of  what  is 
expected  to  be  accomplished  under  them,  that  this  statement  has 
been  prepared. 

No  apology  is  made  for  the  subject;  taxation  is  not  a  popular 
theme,  although  it  touches  directly  a  greater  proportion  of  the 
people  than  any  other  function  of  government.  Public  under- 
standing of  its  elements  and  its  problems  is  neglected  only  at  the 
peril  of  the  public.  A  careful  reading  of  this  pamphlet  is  urged 
upon  every  legislator,  administrative  official  and  citizen. 

The  discussion  falls  naturally  into  three  parts:  First,  as  to 
the  present  tax  system;  second,  as  to  the  administration  of  local 
revenue  laws;  and  third,  as  to  the  pending  measures.  The  whole 
is  intended  to  be  briefly  comprehensive  rather  than  discursive, 
and  to  present  a  summary  of  the  arguments  in  behalf  of  the 
pending  legislation  at  Sacramento. 

DUDLEY    GATES,    Secretary. 
CALIFORNIA    STATE    TAX    ASSOCIATION. 


H 


1.      AS  TO  THE  TAX  SYSTEM. 

California  in  1910  adopted  a  tax  system  providing  for  the  sep- 
aration of  state  and  local  revenues,  certain  properties  being 
selected  for  exclusive  taxation  by  the  state. 

After  four  full  years'  experience,  a  general  survey  of  the  sys- 
tem leads  to  these  conclusions: 

First,  the  revenues  accruing  to  the  state  do  not  increase  pro- 
portionately with  the  state's  needs,  and  in  other  essentials 
the  system  fails  to  meet  the  promises  made  for  it; 

Second,  serious  problems  and  defects  not  anticipated  in  1910 
have  developed  in  its  administration; 

Third,  revision  is  necessary  before  these  shortcomings  and  de- 
fects, which  are  cumulative,  work  injury  to  the  state; 

Fourth,  a  return  to  the  principles  and  methods  discarded  in 
in   1910  is  impossible; 

Fifth,  a  thorough  investigation  must  be  made  before  the  open- 
ing of  the  next  legislature  in   1917;  and 

Sixth,  in  order  to  obtain  immediate  results  from  such  an  in- 
vestigation, the  next  legislature  must  be  given  power  to 
revise  the  system. 

A.     Revenues  Fall  Behind  State's  Needs. 

At  the  time  the  Constitutional  Amendment  embodying  the 
present  plan  of  taxation  was  before  the  people  in  1910,  the  pro- 
ponents of  the  measure  claimed,  among  many  others,  the  follow- 
ing advantages   for  the   new   system: 

(i)  The  corporations  thereafter  would  pay  all  of  the  State's 
expenses; 

(2)  The  difficulties   of   equalization   would   be   ended; 

(3)  The  conditions   of  local   taxation  would   improve;   and 

(4)  The  tax  burden  on  local  real  estate  would  be  materially 
lightened. 

State  Revenues  Inadequate. 

In  promising  (i)  that  the  corporations  would  pay  all  of 
the  State's  expenses,  it  evidently  was  assumed  that  the  State's 
needs  would  increase  at  a  fixed  rate,  that  no  State  revenues  would 
be  lost,  and  that  general  economic  conditions  aflfecting  corpora- 
tions would  remain  constant  as  of  the  year  1910. 

Experience  has  disproved  each  of  these  assumptions.  First, 
is  has  been  found  that  the  needs  of  the  State  increase  faster  than 
the  inelastic  revenues  selected  for  its  use.  Second,  two  sources 
of  revenue  counted  on  to  help  sustain  the  separation  plan  (  i.  c., 
the  poll  tax  and  corporation  license  tax)  have  been  lost.  Third, 
economic  conditions  have  not  remained  constant  as  of  the  year 
1910  but  have  changed  to  such  an  extent  as  to  aflfect  seriously 
the  gross  earnings  of  the  public  utility  corporations  taxed  for 
State  purposes. 


905564 


The  combined  effect  of  these  three  factors  has  been  to  create 
a  prospective  deficit  in  the  coming  biennial  period  of  approxi- 
mately $1,500,000,  which  the  Legislature  must  meet  either  through 
the  levy  of  a  State  ad  valorem  tax  or  by  experimenting  in  the 
field  of  "new  revenue  sources." 

Equalization  Problems  Unsolved. 

In  promising  (2)  that  adoption  of  the  present  tax  system 
would  bring  an  end  to  the  difficulties  of  equalization,  it  was  as- 
sumed that  the  rates  originally  applied  to  the  gross  earnings  of 
corporations  established  these  properties  on  an  equality  with 
property  at  large  for  years  to  come,  and  that  these  rates  would 
bear  with  substantial  equality  upon  the  individual  corporations 
within  each  group. 

As  against  these  assumptions,  it  must  be  set  down:  First, 
that  a  new  equalization  between  corporations  and  general  prop- 
erty has  been  necessary  at  each  session  of  the  Legislature,  in 
1913  and  in  191 5;  and  second,  that  the  gross  earnings  rates  ap- 
plied to  the  corporations  do  not  bear  evenly  upon  the  individual 
corporations  within  the  several  groups,  but  in  their  effect  vary 
widely  from  the  average. 

Local  Conditions  Unchanged. 

In  promising  (3)  that  separation  would  improve  the  conditions 
of  local  taxation,  it  was  assumed  that  the  undervaluation  of  prop- 
erty was  caused  solely  by  the  desire  of  county  assessors  to  evade 
part  of  the  State  tax,  and  that  without  a  State  levy  undervalua- 
tion would  cease. 

It  is  a  matter  of  common  knowledge  that  undervaluation  is 
practiced  by  local  assessors  exactly  as  in  the  past. 

Effect  of  Separation  on  Local  Rates. 

The  effect  of  separation  on  local  tax  rates  was  predicted  as 
follows  by  the  Special  Commission  on  Revenue  and  Taxation 
which  drafted  the  present  laws  (1906  Report,  page  88): 

"As  the  overtaxation  of  real  estate  is  far  and  away  the 
verv  worst  evil  in  our  present  system,  the  commission 
feels  particularly  gratified  that  it  has  been  able  to  devise 
a  plan  which  will  afford  this  class  of  taxpayers  substantial 
relief." 

Data  has  not  been  gathered  from  all  of  the  counties,  but  the 
experience  of  San  Francisco  may  be  taken  as  typical.  The  record 
of  State  and  local  tax  rates  in  the  years  immediately  before  and 
after  1910  is  as  follows: 

1908-09  State   and  local   combined $1.90 

iQOQ-io  State   and   local    combined 1.96 

1910-1 1  State   and   local    combined 2.00 

*I9II-I2  Local    rate    only 2.00 

1912-13  Local    rate    only 2.0.S 

1913-14  Local    rate    only 2.20 

1914-15  Local    rate    only 2.25 

(*Separation   plan  in    effect    1911.) 


The  basis  of  valuation,  approximately  50  per  cent  according 
to  the  assessor,  has  remained  unchanged.  The  table  shows,  there- 
fore, that  San  Francisco,  as  a  local  taxing  district,  absorbed  the 
savings  promised  to  the  taxpayer  by  the  Revenue  and  Taxation 
Commission.  Practically  every  local  taxing  district  in  the  State 
has  followed  the  same  practice,  with  the  result  that  the  burden 
on  real  estate  is  as  great  or  greater  than  before  separation  went 
into  effect. 

B.     Unexpected  Problems  and  Defects. 

Administration  of  the  revenue  system  adopted  in  1910  has 
developed  the  presence  of  grave  faults  which  apparently  were 
not  anticipated.  A  full  enumeration  is  not  attempted  here,  but 
the  list  includes: 

(i)  The  problem  of  equalization  between  corporations  and 
general   property; 

(2)  The  unequal  burden  imposed  upon  corporations  within 
the  same  group; 

(3)  The  tendency  to  local  extravagance; 

(4)  The  indifference  of  the  public  to  the  State's  expendi- 
tures; and 

(5)  The  disadvantageous  position  of  the  State  with  respect 
to  "bond  refunds." 

The  Problem  of  Equalization. 

When,  as  in  California,  certain  properties  (the  utilities)  are 
taxed  by  one  method  and  other  properties  (the  common  forms) 
are  taxed  by  a  different  method,  it  is  necessary  to  have  some 
basis  of  equalizing  the  burden  between  them;  in  other  words, 
some  means  of  expressing  both  taxes  in  terms  of  a  rate  on  unit 
value. 

In  order  to  effect  this  equalization,  it  is  necessary  to  know 
(a),  the  basic  ratio  of  taxes  to  true  value  in  the  State  at  large; 
and  (b)  the  ad  valorem  rate  paid  by  corporations  taxed  on  their 
gross   earnings. 

Determination  of  the  first  fact  (a)  is  impeded  by  variations 
in  local  methods  of  assessment,  due  to  lack  of  a  uniform  inter- 
pretation and  administration  of  the  law,  and  by  the  common 
practice  of  local  assessors  of  undervaluation,  which  results  in  the 
return  of  property  on  the  assessment  rolls  at  from  25  to  50  per 
cent  of  its  true  value. 

Determination  of  the  second  fact  (b)  is  impeded  by  certain 
inherent  difficulties  in  the  process  of  translating  gross  earnings 
taxes  into  a  rate  on  unit  value. 

California's  equalization  problem  finds  no  parallel  in  any 
State,  with  the  single  exception  of  Minnesota,  and  there  it  is 
only  one-half  as  difficult,  by  reason  of  the  fact  that  through  the 
central  control  of  assessments,  Minnesota  is  able  to  determine 
with  a  fair  degree  of  accuracy  the  basic  rate  for  the  State  at 
large.  In  California  the  very  measuring-stick  applied  to  the  cor- 
porations  is   itself  defective,   in   that   its   length    cannot   be   deter- 


6 

mined  definitely.  Both  in  1913  and  again  in  1915  corporation 
rates  were  adjusted  on  the  vague  basis  of  assumption  and  com- 
promise. 

Before  1917  a  definite  means  of  equalizing  corporation  taxes 
must  be  worked  out  and  made  available  to  the  Legislature.  Mys- 
tery in  a  tax  system  soon  becomes  suspicion,  and  justice  both 
to  the  corporations  and  to  the  common  taxpayer  demands  that 
it  be  eliminated. 

Corporations  Unevenly  Taxed. 

Another  fruitful  field  of  inequality  is  found  in  the  attempt  to 
apply  a  single  rate,  based  on  the  average  valuation,  to  all  of  the 
corporations  of  a  particular  class,  such  as  to  all  railways,  in- 
cluding street  railways,  all  telephone  companies,  all  gas  and 
electric  companies,  etc.  Even  between  companies  of  approxi- 
mately the  same  size  there  are  wide  variations,  while  in  many 
cases  the  system  gives  rise  to  bitter  complaint  on  the  part  of 
small  companies  that  are  plainly  over-taxed. 

Tendency  to  Local  Extravagance. 
Local  tax  levies  all  over  the  State  have  grown  enormously 
since  separation  went  into  effect,  due  in  part  to  external  causes 
not  related  to  the  change,  but  partly  also  to  the  opportunity 
which  the  new  plan  of  taxation  gave  local  authorities  to  increase 
their  levies  without  raising  the  rates.  The  "benefits"  thus  con- 
ferred by  separation  are  questionable,  in  spite  of  the  elaborate 
and  attractive  calculations  of  "net  gains"  that  have  been  pub- 
lished from  time  to  time. 

Indifference   to    State   Expenditures. 

Separation  makes  inevitably  for  a  careless  attitude  on  the 
part  of  the  common  taxpayer  towards  the  State's  expenditures, 
in  which  he  is  not  directly  and  personally  interested.  Without 
going  into  the  merits  of  the  several  bonding  measures  that  were 
before  the  people  in  the  late  election,  it  is  a  significant  fact  that 
one  of  the  principal  arguments  for  their  adoption  catered  de- 
liberately to  this  indifference,  in  that  voters  were  told  that  their 
approval  would  "cost  nothing  because  the  corporations  pay  all 
of  the   State  taxes." 

Problem  of  "Bond  Refunds." 

When  the  State  withdrew  the  "operative  property"  of  corpor- 
ations from  local  taxation,  provision  was  made  to  reimburse  the 
counties,  cities  and  districts  which  had  bonded  themselves  on 
the  basis  of  their  total  assessment  rolls  prior  to  1910,  but  no 
definite  amount  to  be  returned  to  the  local  districts  was  fixed. 
As  a  result,  local  assessors  have  taken  advantage  of  the  decen- 
tralized condition  of  the  revenue  system  to  raise  the  basis  of  as- 
sessment of  operative  property  in  order  to  increase  the  amounts 
collected  from  the  State.  The  refimds,  which  in  justice  to  the 
State  should  have  remained  stationary,  increased  from  $650,000 
in    191 1   to  $742,000  in    1913  and  are   still   growing. 


C.  Present  Tax  System  Must  be  Revised. 

In  view  of  the  foregoing,  it  is  apparent  that  the  defects  of  the 
present  revenue  system  must  be  corrected  before  the  State's 
revenues  are  more  seriously  embarrassed  and  before  the  other 
problems  become   too   menacing. 

The  defects  that  have  been  recited  are  of  a  general  nature. 
There  are  still  others  that  demand  attention.  One  that  has 
caused  wide  discussion  relates  to  the  methods  applied  in  the 
taxation  of  general  corporation  franchises.  This  is  California's 
application  of  the  "corporate  excess"  tax,  and  under  it  "there  is 
lost  all  of  that  certaintj'  and  simplicity  and  much  of  that  relative 
justice  w^hich  are  the  fundamental  requisites  of  a  workable  tax."* 

Revision  means  that  the  whole  problem  of  taxation.  State 
and  local,  must  be  investigated  and  the  system  overhauled  and 
dissected.  Other  States  have  solved  many  of  the  difficulties  that 
confront  California,  and  it  may  become  desirable  and  expedient 
to  follow  them.  The  point  made  here  is  that  in  undertaking  the 
reconstruction  of  the  revenue  laws,  not  patch-work  but  homo- 
geneity must  be  the  aim. 

D.  Return  to  the  Old  System  Impossible. 

One  important  fact  should  be  borne  in  mind,  namely,  that  the 
present  system  is  a  tremendous  improvement  over  the  old.  Cali- 
fornia took  a  long  step  in  advance  in  1910  and  with  that  step 
overcame  forever  many  of  the  defects  and  weaknesses  inherent 
in  the  old  general  property  tax  as  applied  to  corporations. 

There  can  be  no  possible  return  to  a  system  wrhich  permits 
the  assessment  of  corporate  property  by  a  hundred  or  more  local 
assessors,  the  gerrymandering  of  "shoe-string"  taxing  districts, 
and  the  almost  total  escape  of  "intangible"  values,  including  na- 
tional bank  stock,  franchises,  etc. 

Furthermore,  there  is  the  principle  of  separation  which  in  its 
application  to  California  cannot  be  challenged.  It  is  axiomatic 
that  those  properties  which  have  not  a  strictly  local  situs  de- 
termining their  value  should  be  taxed  by  the  State  and  the  pro- 
ceeds spent  in  such  a  way  as  to  distribute  the  benefits  through- 
out the  whole  State.  Such  properties  are  the  railroads  and  other 
public  utilities  operating  in  two  or  more  counties,  the  banks, 
insurance  companies  and  corporate  franchises. 

It  will  not  be  necessary  to  discard  this  principle  in  the  aband- 
onment of  complete  separation.  Other  States  that  have  found 
complete  separation  a  failure  (for  California's  experience  follows 
the  universal  rule)  have  retained  the  principle  and  embodied  it 
in  some  sound  plan  of  partial  separation  that  overcomes  the  vital 
defect   of  complete   separation — inelasticity. 

Whatever   changes   grow    out   of   the   present    situation   in    the 


*The  opinion  of  a  leading  authority  with  respect  to  Cali- 
fornia s  method  of  taxing  franchises,  quoted  from  Dr.  Thomas  S. 
Adams,  member  of  the  Wisconsin  Tax  Commission. 


next   two  years,   the   advantages   of  the   system   adopted   in    191U 
must  and  can  be  saved. 

E.     An   Investigation  Necessary. 


Revision  of  the  tax  system  is  of  such  tremendous  importance 
that  it  may  not  be  entered  upon  without  full  preparation.  For 
that  reason  a  complete  and  thorough  investigation  should  be 
made  before  the  opening  of  the  legislative  session  of  1917.  It 
is  estimated  that  more  than  a  year  will  be  required  to  make  a 
proper  study  of  the  tax  systems  of  this  and  other  States,  and  sat- 
isfactory results  will  not  be  obtained  if  the  work  is  left  to  legis- 
lative  committees   working   while   the   Legislature   is   in   session. 

F.     Prompt  Action  Required. 

To  avoid  delays  in  carrying  into  efTect  the  recommendations 
that  will  grow  out  of  the  investigation,  the  next  Legislature  must 
be  given  authority  to  revise  that  section  of  the  Constitution 
which  embraces  the  present  revenue  system  of  the  State  (Article 
XIII,  Section  14).  The  only  way  to  confer  this  power  upon  the 
Legislature  of  1917  is  by  submitting  to  the  people  at  the  next 
general  election  an  amendment  to  the  Constitution  and  securing 
its  ratification.  Otherwise  it  will  be  necessary  to  wait  four  full 
years  before  the  defective  system  can  be  changed. 


2.     AS  TO  THE  ADMINISTRATION  OF  REVENUE 

LAWS. 

Revenue  for  local  purposes  in  California  is  obtained  through 
the  levy  of  the  general  property  tax  on  all  forms  of  property 
except  those  reserved  for  exclusive  taxation  by  the  State  and 
those  exempt  under  the  Constitution. 

Examination  of  the  conditions  surrounding  the  use  of  the 
general  property  tax  in  this  and  other  States  leads  to  these  con- 
clusions: 

First,  the  equitable  assessment  of  property  is  of  tremendous 
social   and   economic   importance; 

Second,  equality  and  justice  are  lost  by  reason  of  the  uni- 
versal practice  of  undervaluation  by  local  assessors; 

Third,  assessment  at  full  value  as  required  by  law^  is  essential, 
with  a  limited  tax  rate  to  protect  assessors  who  obey  the 
law; 

Fourth,  such  an  assessment  at  full  value  is  impossible  without 
central    supervision;    and 

Fifth,  California  should  create  a  State  tax  commission  with 
power  to  require  the  uniform  interpretation  and  adminis- 
tration of  the  law. 

A.     The  Importance  of  Equitable  Assessments. 

The  weaknesses  of  the  present  decentralized  administration 
of  local  revenue  laws  chiefly  aflfect  the  common  forms  of  prop- 
erty,    and  thus  come  home  to  every  taxpayer  in  the  State. 

Common  forms  of  property,  as  distinguished  from  corporate 
property,  pay  85  per  cent  of  the  total  taxes.  State  and  local,  col- 
lected in  California,  yet  the  methods  of  assessment  and  equaliza- 
tion in  common  use  are  inefficient  and  expensive,  and  absolutely 
prohibitive  of  that  equality  between  individuals  that  is  the  founda- 
tion of  a  just  tax  system. 

It  is  in  the  local  assessment  that  the  germ  of  inequitable  tax- 
ation finds  its  origin.  Unless  the  initial  assessment  can  be  made 
fair  and  uniform,  taxation  develops  gross  abuses  and  deliberate 
tax-dodging  becomes  a  common  practice. 

The  importance  of  the  problem  grows  yearly,  with  the  tre- 
mendous increases  in  local  taxation.  Between  1910  and  1914.  the 
taxes  levied  on  assessments  made  by  a  hundred  or  more  local 
assessors,  each  interpreting  and  administering  the  law  accord- 
ing to  his  individual  notions,  increased  more  than  60  per  cent, 
or  from  approximately  $47,000,000  to  $76,000,000. 

These  are  large  sums  to  be  withdrawn  from  the  State's  wealth 
for  the  purposes  of  government.  It  is  of  utmost  importance  that 
such  a  great  public  burden  be  distributed  as  fairly  as  sound  laws 
and  scientific  administration  can  achieve. 


/ 


10     V 

B.  The  Practice  of  Undervaluation. 

It  is  a  matter  both  of  record  and  of  common  knowledge  that 
undervaluation  is  practiced  by  every  local  assessor  in  California. 
In  this  practice,  for  which  (it  is  important  to  remember)  the 
assessor  cannot  be  held  to  blame,  is  found  the  "germ  of  inequit- 
able taxation"  that  has  diseased  the   entire  revenue  system. 

An  investigation  made  two  years  ago  by  the  State  Board  of 
Equalization  showed  that  the  average  ratio  of  assessed  to  true 
value  in  the  State  at  large  was  45.1  per  cent.  In  some  of  the 
counties  the  average  was  as  low  as  25  per  cent;  in  others  it  came 
to  more  than  50  per  cent.  No  attempt  was  made  to  ascertain 
the  variations  within  any  county,  but  these,  it  may  fairly  be  sur- 
mised, were  at  least  as  great  as  the  variations  between  the  several 
counties. 

The  inevitable  result  of  undervaluation  is  a  great  lack  of  uni- 
formity in  the  assessment  of  different  kinds  of  property  in  the 
same  county  and  the  same  kinds  of  property  in  the  different 
counties. 

C.  Equitable  Assessment  Must  be  at  Full  Value. 

Although  of  course  it  is  theoretically  possible,  tax  adminis- 
trators universally  agree  that  it  is  practically  impossible  to  se- 
cure uniformity  of  assessment,  and,  therefore,  equality  of  tax- 
ation, except  on  the  basis  of  actual  value.  The  moment  a  frac- 
tional basis  is  introduced,  each  assessor  becomes  a  law  unto 
himself  and  an  imperfect  one,  in  spite  of  his  own  best  eflForts. 
Uniformity  is  lost  in  the  continual  shifting  of  percentages  and 
rates. 

The  fact  that  in  47  States,  including  California,  property  is 
required  by  law  to  be  listed  at  its  actual  value  shows  that  assess- 
ment at  actual  value  is  generally  considered  fundamentally  sound, 
and  the  only  practicable  means  of  securing  equality  of  taxation 
between  individuals. 

The  Opinions  of  Leading  Authorities. 

On  the  practice  of  undervaluation,  all  students  of  taxation 
agree  that  it  is  a  cloak  for  the  gravest  abuses  of  the  general 
property  tax.  The  following  expressions  represent  the  views  of 
three  leading  American  authorities  on  the  subject. 

"Nothing  is  practical,  nothing  is  right  and  just  but  the 
use  of  full  value.  Any  departure  from  full  value  as  the  sole 
aim  leads  to  inequalities." — Professor  Carl  C.  Plehn. 

"We  are  learning  that  assessment  at  the  full  value  is  the 
only  means  by  which  equality  in  individual  assessments  can 
be  secured;  and  that  in  a  community  where  the  average 
valuation  is  50  per  cent,  individual  assessments  may  vary 
from  20  to  120  per  cent  of  the  true  value  of  the  property." — 
Professor  Charles  J.  Bullock,  Harvard  University. 

"An  equitable  assessment  cannot  be  made  except  at  full 
value,   and   unless   the  assessment   is   at   full   value   the   in- 


11 


dividual  taxpayer  has  no  real  protection  agfainst  over-assess- 
ment."— Edward  L.  Heydecker,  Assistant  Tax  Commis- 
sioner,  New  York  City. 

Limiting  the  Tax  Rate. 

Raising  the  basis  of  assessment  to  actual  value  necessary  re- 
quires the  placing  of  some  restraint  upon  the  autliorities  levying 
local  taxes,  to  prevent  them  from  using  the  augmented  assess- 
ment roll  to  increase  the  levy.  This  problem  can  be  met,  as  in 
other  states,  by  a  state-wide  limitation  upon  tax  rates,  thus  al- 
laying the  fears  of  assessors  and  taxpayers,  often  expressed,  that 
assessment  at   full   value   would   add   to   the   tax  burden. 

D.     Centralized  Control  of  Assessments  Necessary. 

In  California  it  has  been  absolutely  impossible  to  realize  as- 
sessment at  full  value  because  of  the  decentralized  administrative 
machinery.  This  fact  alone  furnishes  the  strongest  possible  argu- 
ment in  support  of  the  proposal  to  create  a  permanent  State  tax 
commission  with  power  to  assist  and  direct  local  assessors  and 
compel  them  towards  a  uniform  interpretation  and  administra- 
tion of  the  law. 

Undervaluation  is  not  primarily  the  fault  of  the  local  assessor. 
Under  the  present  system,  no  assessor  in  the  State  dares  to  de- 
part from  the  custom.  On  the  one  side  he  is  bound  by  the  cus- 
tom itself  and  by  the  fact  that  his  constituents  generally  believe 
they  are  able  to  escape  part  of  their  taxes  through  undervaluation. 
On  the  other  side,  he  is  held  down  by  the  knowledge  that  the 
board  of  supervisors  of  his  county,  or  the  council  of  his  town, 
would  almost  certainly  use  the  larger  roll  to  raise  the  amount  of 
the  levy,  in  the  absence  of  any  restraint. 

Between  these  two,  the  assessor  is  powerless,  but  with  full 
control  vested  in  a  central  commission  and  the  taxing  author- 
ities under  statutory  restraint,  the  way  will  be  open  to  securing 
a  measure  of  equality  in  assessments  that  can  never  be  possible 
under  the  present  system. 

Central  control  does  not  mean  the  removal  of  local  elected 
assessors  and  the  appointment  of  their  successors.  The  laws  of 
Minnesota,  Kansas,  Arizona,  Wisconsin  and  other  States  give 
to  the  tax  commission  full  authority  over  the  machinery  of  as- 
sessment and  equalization,  but  only  in  Ohio  are  the  local  as- 
sessors appointed  instead  of  elected.  No  change  in  the  method 
of  selecting  assessors  is  required  to  accomplish  the  ends  desired 
in  California. 

What  Central  Control  Would  Mean. 
Expressed   positively,  central  control   of  the  machinery   of  as- 
sessment and   equalization   of  property  values   would   mean 

(a)  the  uniform  interpretation   and  administration    of   the   law; 

(b)  the  assessment  of  all  property  at  full  value; 

(c)  the    protection    of    the    willing    and    efficient    assessor    in 
his  job; 


12 

(d)  the  elimination  of  the  influence  of  local  politics; 

(e)  an  end  to  the  costly  double  assessment  of  the  same  prop- 
erty, as  by  a  county  assessor  and  a  city  assessor  working  in 
the  same  field; 

(f)  the  possible  adoption  of  biennial  or  quadrennial  assess- 
ments of  real  estate,  instead  of  annual  assessments,  thus 
effecting  a  large  saving  to  local  taxpayers  (local  assess- 
ments now  cost  more  than  $1,000,000  a  year);  and 

(g)  the  uniform  use  of  rules  and  standards  supplied  by  the 
State  commission. 

E.     Creation  of  State  Tax  Commission. 


The  literature  of  modern  taxation,  reciting  the  experience  of 
other  States,  is  filled  with  examples  showing  the  efficiency  of 
centralized  assessing  power,  as  in  Wisconsin,  Kansas,  Minnesota, 
Ohio,  etc.,  and  the  inefficiency  of  uncontrolled  local  assessments. 
The  situation  is  tersely  stated  in  the  following  paragraph  from 
a  report  of  the  Minnesota  Tax  Commission: 

"The  most  hope  for  better  administration  seems  clearly 
to  point  to  centralization  of  assessment  and  administration 
of  tax  laws  that  shall  be  modified  and  amended  from  time 
to  time  to  meet  new  conditions." 

In  view  of  the  conditions  which  have  been  shown  to  exist  in 
California,  the  importance  of  improving  the  administrative  ma- 
chinery cannot  be  emphasized  too  strongly.  The  most  successful 
experience  points  unmistakably  to  the  creation  of  a  State  tax 
commission. 

The  responsibility  of  the  State  in  the  matter  is  not  lessened 
by  the  fact  that  temporarily,  at  least,  there  is  no  State  tax  levied 
against  local  assessments  in  California.  The  United  States  Com- 
missioner of  Corporations,  in  the  introduction  to  a  volume  en- 
titled "Special  Report  on  Taxation,"  published  in  1913,  writes  on 
the  subject: 

"This  system  (separation  of  State  and  local  revenues) 
avoids  inequalities  incidental  to  the  levying  of  a  State  rate 
on  assessments,  which  in  some  counties  may  be  above  and 
in  other  counties  below  the  State's  average  valuation,  thus 
limiting  the  tax  inequalities  between  individual  parcels  of 
propertv  to  such  as  mav  exist  within  a  given  county,  but 
it  does  not  obviate  the  necessity  for  strong  centralized 
State  administration  of  tax  laws,  since  no  method  of  selec- 
tion has  yet  been  devised  which  permanently  guarantees  a 
sufficiency  of  State  revenue." 

Professor  Bullock,  the  Harvard  authority  on  taxation,  concurs 
in  this  opinion.  On  the  practice  of  undervaluation  and  its  effect 
upon  individual  taxpayers,  he  writes: 

"Such  a  condition  in  local  taxation  is  not  a  thing  of  in- 
diflFerence  to  the  State  at  large;  taxation  is  not  a  matter  of 
purelv  local  concern.  The  propertv  that  is  overburdened 
mav  belong  to  a  small  minoritv  that  has  no  effective^  voice 
in  local  affairs.  The  State  has  an  obvious  dutv  in  the 
premises,  which  cannot  be  iustlv  or  honorablv  evaded.  Sep- 
aration has  nowhere  solved  the  problem  of  local  taxation; 


13 

and,  whatever  its  merits  or  demerits  otherwise,  does  not 
relieve  the  State  of  its  responsibility  in  this  important 
matter." 

Further,  on  the  subject  of  State  control  of  local  assessments 
by  a  central  tax  commission,  Professor  Bullock  accurately  meets 
the  situation  in  California  when  he  writes: 

"The  experience  of  American  States  demonstrates  beyond 
all  doubt,  cavil  or  contradiction  that  there  never  was  and 
never  can  be  a  generally  satisfactory  assessment  of  property, 
incomes  or  business  by  purely  local  authorities. 

"Local  administration  can  never  give  us  a  satisfactory 
system  of  taxation,  and  the  co-operation  of  State  author- 
ities has  become  absolutely  indispensable.  For  this  work 
the  old-fashioned  board  of  equalization  is  useless,  State 
boards  with  ex-officio  members  wholly  inadequate,  and  a 
permanent  tax  commission,  composed  of  well-paid  experts 
enioyine  certainty  of  tenure,  independence  of  action,  and 
freedom  from  political  influence,  the  only  effective  agency." 

Other  authorities  speak  with  equal  force  for  a  tax  commis- 
tion  with  wide  supervisory  powers.  Thomas  S.  Adams,  member 
of  the  Wisconsin  Tax  Commission  for  many  years,  writes: 

"A  strong  tax  commission  is  recognized  by  every  au- 
thority as  an  indispensable  part  of  the  successful  tax 
system." 

Professor  Plehn  goes  even  further,  and  would  have  the  as- 
sessments made  directly  by  the  central  commission,  acting 
through  appointed  assessors.  In  an  address  at  the  Washington 
State  Tax  Conference  held  in  Seattle  last  year,  Professor  Plehn 
said: 

"While  defective  definitions,  and  absence  of  classifica- 
tion have  been  responsible  for  many  evils  in  the  property 
tax  in  the  past,  the  greater  ones  have  arisen  from  weakness 
of  administration. 

"The  requirements  for  the  assessor's  office  and  its  work 
directly  imply:  (i)  a  strong  central  State  tax  commis- 
sion. (2)  appointed  assessors  responsible  to  the  tax  com- 
mission only,  (.^)  civil  service  rules,  and  the  removal  of  the 
assessors  and  the  tax  commission  as  far  as  possible  from 
political  influences,  and  (4)  pre-equalization  like  a  pre-audit 
involving  the  standardization  of  assessment  methods  and 
the  fixing  of  standard  values  by  the  central  tax  commis- 
sion." 

It  is  a  significant  fact  that  with  the  single  exception  of  Cali- 
fornia, every  American  state  that  has  made  signal  advances  in  the 
field  of  taxation  in  recent  years  has  discarded  its  old-fashioned 
board  of  equalization  in  favor  of  an  appointed  tax  commission. 
The  list  includes  Massachusetts,  New  York,  Ohio,  Wisconsin, 
Michigan,  Minnesota,  Kansas,  Oregon  and  25  others. 

Other  Functions  of   State   Tax   Commission. 

Except  in  a  static  commonwealth,  no  laws  relating  to  taxation 
can  be  deemed  permanent.  Social  and  economic  changes  of  vital 
importance    are    constantly    taking    place,    and    a    tax    system    re- 


14 

quires  perpetual  investigation.  It  is  the  proper  function  of  a 
State  tax  commission  to  keep  abreast  of  the  revenue  problems 
and  advise  the  Legislature  and  the  public  thereof. 

Regardless  of  the  nature  of  the  changes  which  it  may  be 
necessary  to  make  in  the  California  revenue  system  two  years 
hence,  it  may  be  taken  as  a  certainty,  based  on  the  experience  of 
33  States,  that  the  new  laws  will  be  more  successfully  adminis- 
tered if  placed  in  the  hands  of  a  body  of  men  chosen  for  their 
technical  knowledge  and  ability. 


15 

3.     AS   TO   THE   PENDING   MEASURES. 

The  problems  presented  in  the  foregoing  discussion  have  long 
had  the  attention  of  certain  of  the  State  officials  and  members  of 
the  Legislature  familiar  with  the  situation,  and  plans  for  their 
solution  have  been  under  consideration  for  months. 

With  the  opening  of  the  session  in  January,  Senator  Newton 
W.  Thompson  introduced  three  measures  looking  to  the  neces- 
sary improvement  of  the  whole  revenue  system.  These  measures, 
which  will  be  acted  upon  by  the  Legislature  after  the  Constitu- 
tional recess,  provide  as  follows: 

A.     Full  investigation  of  Revenue  System. 


The  first  is  a  bill  appropriating  $75,000  to  be  spent  under  the 
direction  of  the  Governor  during  the  next  two  years  in  making  a 
thorough  investigation  of  the  revenue  system  of  California,  both 
State  and  local,  to  the  end  that  the  Legislature  of  1917  may  be 
in  possession  of  facts  on  which  to  act  intelligently  in  equalizing 
corporation  rates  and  revising  the  system. 

B.  Authority  to  Amend  Present  System. 

The  second  is  a  Constitutional  Amendment  to  be  voted  on  in 
the  next  election,  authorizing  the  Legislature  in  1917  or  in  any 
subsequent  year  to  amend  Section  14  of  Article  XIII  of  the  Con- 
stitution relating  to  the  taxation  of  certain  properties  taxed  ex- 
clusively for  State  purposes.  This  is  purely  an  enabling  act  and 
does  not  commit  the  Legislature  or  the  people  to  any  particular 
method  of  taxation,  while  leaving  intact  the  original  Constitu- 
tional limitations  upon  legislative  power. 

C.  Creating  a  State  Tax  Commission. 

The  third  is  a  Constitutional  Amendment  abolishing  the 
present  elected  board  of  equalization  and  creating  a  permanent 
State  tax  commission,  to  be  appointed  by  the  Governor  and  to 
have  full  power  and  authority  over  the  revenue  system,  both 
State  and  local,  in  California,  including  the  machinery  of  assess- 
ment and  equalization.  This  measure  is  in  harmony  with  the 
best  economic  thought  and  most  successful  experience,  and  is  a 
necessary  basis  for  other  fiscal  reforms  which  may  appear  ad- 
visable later. 


CALIFORNIA      STATE      TAX      ASSOCIATION. 


The  CALIFORNIA  STATE  TAX  ASSOCIA- 
TION is  a  non-partisan,  non-political  organization 
devoted  to  promoting  a  wider  public  interest  in  the 
important  subject  of  taxation. 

This  Association  was  organized  in  1913. 


The  objects  of  the  Association  are 

"to  correct  existing  evils  and  inequalities  in  taxa- 
tion; promote  economy  in  public  expenditures,  both 
State  and  local,  and  to  formulate  and  announce  the 
most  progressive  economic  thought  and  administra- 
tive experience  available  for  the  correct  guidance  of 
public  opinion,  legislative  and  administrative  action 
on  all  questions  pertaining  to  State  and  local  tax- 
ation." 


OflScers 

President John  S.  Drum 

First  Vice-President J.  F.  Sartori 

Second   Vice-President M.    L.    Requa 

Secretary Dudley    Cates 


Directors 


John  S.  Drum 
Allen  G.  Wright 
Allen  Chickering 

B.  F.  Schlesinger 
George  T.  Klink 
Marshall  Hale 

C.  O.  G.  Miller 
San  Francisco 


J,  F.  Sartori 
Geo.  I.  Cochran 
W.  E.  McVay 
W.  W.  Mimes 
H.  W.  O'Melveny 
Los  Angeles 

M.  L.  Requa 
Oakland 


THK  LiUKAKY 

UNIVERSITY  OF  CALIFORNIA 

LOS  ANGELE3 


tuiora  ■ 


PAMPHIET   BINDER 

ZI^Z   Syrocuje,  N.  Y. 
Z:^—    Stockton,  Colif. 


SOUTHERN  REGIONAL  UBR^^^^^^^^^^^^^^ 


AA    001194  083    0 


